Consumer board begins oversight of payday lenders

CFPB chief also to scrutinize student and local mortgage lenders

By

RonaldD. Orol

WASHINGTON (MarketWatch) — Hitting the ground running, the head of a new U.S. watchdog agency said Thursday he’s launching a program to supervise a broad swath of businesses including payday lenders, private student lenders and local mortgage lenders.

“We will begin dealing face to face with payday lenders, mortgage servicers, mortgage originators, private student lenders, and other firms that often compete with banks but have largely escaped any meaningful federal oversight,” said Richard Cordray, newly appointed chief of the Consumer Financial Protection Bureau.

Obama sidesteps Senate on CFPB

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President Obama appointed Richard Cordray as head of the Consumer Financial Protection Bureau after bypassing the Senate's opposition to the move. (Photo: Reuters.)

Senate Republicans had been refusing to approve Cordray on grounds that the agency was too powerful, structurally flawed and lacked accountability to Congress. Republicans, many of whom are dead-set against the bureau’s existence, have expressed outrage and already are scheduling hearings to consider the bureau’s legality.

Any legal challenge to the Obama appointment or the bureau’s rules is likely to come from one of the businesses coming under new scrutiny or associations representing them. The firms could claim the CFPB doesn’t have the legal authority to regulate them.

In response, Cordray said in a speech at the Brookings Institution that despite concerns raised about his legal authority he won’t be hesitant in moving forward with implementing the bureau’s new authorities. Cordray added that he believed that as the bureau began offering solutions to consumer problems, he will begin to win over congressional critics. Read more on Cordray.

“There is tremendous support by the public at large,” Cordray said. “The leaders in Congress, even those who may have disagreed with premises of the statute or authorities of the bureau, will begin to see that over time if we do our work well.”

Republicans in Congress “speak to and hear from” the same people who have been reaching out to the CFPB about their problems, he added.

Until now, no regulator has had periodic examination authority over a large cross-section of the consumer-credit industry known as “non-banks,” which, in the runup to the 2008 financial crisis, escaped regulation of any sort.

These firms include payday lenders — which offer cash loans at steep fees, typically to low-income individuals — as well as mortgage-modification consultants and smaller state and local mortgage brokers, some of which originated “toxic” subprime mortgages that set the stage for the crisis of 2008.

The new supervision requirements for this group of businesses will include periodic examinations of their books, with a focus on risks to consumers associated with their products, and interviews with company personnel.

Cordray noted that the markets that will be supervised are big. He cited CFPB statistics noting that payday lenders, only one of several categories of new businesses that will come under oversight, are used by nearly 20 million households that pay roughly $7.4 billion in fees every year.

Objective: ‘Clear standards of conduct’

The new supervision will present a “challenge” for some of these firms, Cordray said, but he added that periodic examinations are necessary.

In his speech, Cordray said that parts of this market contributed to the credit crunch of 2008.

“Many subprime loans during the housing bubble were made by non-bank mortgage brokers,” Cordray said. “Since most of these businesses are not used to any federal oversight, our new supervision program may be a challenge for them. But we must establish clear standards of conduct so that all financial providers play by the rules.”

The Dodd-Frank Wall Street Reform and Consumer Protection Act, approved in response to the crisis, created the CFPB because of a failure by bank regulators to prohibit the creation of subprime mortgages central to the meltdown. The CFPB is responsible for writing rules for mortgages, credit cards and other consumer credit products.

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